Banking Union as a Shock Absorber

Ansgar Belke and Daniel Gros

No 201502, ROME Working Papers from ROME Network

Abstract: This study investigates the shock-absorbing properties of a banking union by providing a detailed comparison between the way regional financial shocks have been absorbed at the federal level in the US, but have led to severe regional (national) financial dislocation and tensions in Europe and particularly in the euro area. The institutions of the banking union, which is now emerging in the euro area, should increase its capacity to deal with future regional boom and bust cycles. Cross-border capital flows in the form of equity appear to be much more stable than those taking the form of credit, especially inter-bank credit. It therefore follows that cross-border banks would be useful to deal with regional shocks. But large banks pose the ‘too big to fail’ problem and they would also propagate regional shocks, especially if they originate in large countries, to the entire area. The extent to which the (incomplete) banking union now put in place for the euro area provides some shock absorption is also discussed.

Keywords: banking union; currency union; default; shock absorber; two-tier reinsurance system. (search for similar items in EconPapers)
JEL-codes: E42 E50 F3 G21 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2015-02
New Economics Papers: this item is included in nep-ban, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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